It's not too late to prevent pensions disaster movie

Published on Friday 13 November 2009 19:43

I LOVE films. Probably the only major films I haven't seen in the last few years are King Kong and Cloverfield. Why not?

I suppose it is because they are disaster movies – and when you know the outcome in advance, it's not much fun watching it unfold.

Thinking about pensions in the UK invokes similar feelings but, unfortunately, I cannot opt out of watching this particular disaster evolving before my eyes.

Take personal accounts, for example. The objective of these is to encourage everyone to save for the future. In an attempt to create a culture of self-help and reduce the state's pension burden, the idea is that everyone who is working will automatically be enrolled into a new style of employer-sponsored pension scheme, unless they are already members of a good-quality scheme.

Once these proposals are fully implemented (from around 2016), employers will need to contribute 3 per cent of salary, employees will contribute 4 per cent and a further 1 per cent will be added through tax relief. So a total of 8 per cent will be contributed on the employee's behalf.

It makes sense so far, but the problem is that the proposed changes are simply too little, too late.

Too little because the cost of funding open final-salary schemes is estimated to be on average 19.7 per cent of a worker's salary, while the average money purchase scheme has a total contribution of about 9 per cent. The average employer contribution to a money purchase scheme is currently 6 per cent and there is a fear that if employers only need to contribute 3 per cent, then they may well take the opportunity to reduce their commitment. As we all know, final salary schemes are struggling, which underlines just how hard it is to build up a pot of money sufficient to provide a decent income in retirement.

Too little because the personal accounts system will be hugely expensive to establish and to police. Too little because people don't have to join – they can simply opt out if they wish. And too little because the needs of carers, voluntary workers and the self-employed are not included.

But the biggest reason why this will fail and why an estimated 65 per cent of workers will opt out anyway is because of the current system of means tested benefits. In other words, it is obvious to the average worker that if you save for retirement, then you will probably lose out on means tested benefits in retirement and when people are penalised for saving then you can hardly expect them to do so on a voluntary basis.

It's also too late because the problem has been known for decades, with Lord Turner's commission recommending that it be established from 2010.

This was then pushed back to 2012 and, in the past few weeks, it has been pushed back again so that full implementation will not be in place before 2016.

I wonder if it's simply time to draw the curtain on this particular disaster movie and start penning the sequel? There is merit in the recent suggestion by Teresa May MP that a more flexible lifetime savings alternative should be developed. The "Kiwi Saver" frequently referred to as a possible starting point is a government-supported voluntary scheme in New Zealand which offers a $1,000 kick-start, tax relief, employer contributions and access in certain circumstances – such as moving home, leaving the country, in the event of serious illness or in the case of financial hardship.

But in our newly impoverished nation, we do need to go much further? If means tested benefits are to remain a preserve of our system, what about winter fuel payments, free TV licences or even the state pension? Why not means test them all?

Or you could just remove means testing for the over-65s over a suitably long period, improve the basic level of benefit in the meantime, and ensure that the young provide for a comfortable retirement themselves through a sensible (and compulsory) system. In that scenario, although it would be a bold step, you might even have a predictable outcome that isn't a disaster.

&#149 Bob Hair is financial planning director at Turcan Connell in Edinburgh.